The Lessons of Bitcoin

Bitcoin is, without any question, one of the most remarkable financial stories of our lifetimes. Simply by running some code on your laptop back in 2010, or putting a few grand into the earliest bitcoin markets, you could be worth hundreds of millions or billions of dollars today. Even quite a bit later in the process, a bold bet that you hung on to could have easily brought you life-changing amounts of money. 

Did you make life-changing amounts of money from Bitcoin?

I didn't. 

I think about that quite a lot.

I made good money from it, in the category of "moving some moderate financial milestones forward a couple of years", which is great. I bought it around the time I wrote this, which still summarises my thoughts on it pretty well. I sold it in February 2018, not long after I wrote this, which I also still like. Short run, the sale was a good call. Longer run, it was a catastrophe.  

If I'd played my cards better and more boldly, at earlier times, I could have ended up with "fuck you" money. For someone writing a pseudonymous blog in 2021, that sure would be handy.

This may sound like a humblebrag, but I promise it's not meant that way.  Internally it feels much more like failure. Chances to make life-changing amounts of money do not come along very often. This was one, and I missed it.

Bitcoin was almost unique in the sense that, to become fabulously rich:

i) you didn't need to have very much money early on (in fact, at the start, you didn't need any at all, just some kind of computer)

ii) you didn't need to risk very large amounts of your wealth to make it happen

iii) everything you needed to do it was publicly searchable on the internet

iv) chances to wind up happily rich persisted for years, including after you probably first heard of bitcoin.

Assuming you didn't make fuck you money from Bitcoin, it's worth pondering what the lessons of this are.

The most obvious instinct, which I fall into from time to time, is essentially just "if only" fantasies. If only I could somehow travel back in time and tell 2010 Shylock to start mining bitcoin! Or to put his life savings into it as soon as possible (and not sell it, and not store it on Mt Gox).

This is the worst kind of loser mentality, taking nothing but fantasy and daydreams from the story. Imagine I had all the future knowledge! Imagine I won the lottery!

But, as it turns out, you don't need to actually transform the question very much for it to be profoundly useful. 

Instead, one is much better off asking "what changes in behavior, mindset and reading habits would I have needed so that I would have actually discovered bitcoin on my own early on and invested in it?"

The reason is that this might actually help you find the next bitcoin. It's possible that buying bitcoin now will still make you rich, but it probably won't make you life changingly-rich (certainly not without risking your whole life savings on it).

The bad news is that it probably will require some hard work and luck. 

It's useful to break the question into two parts:

1. What realistic changes could I have made that might have caused me to come across bitcoin-like ideas earlier than I did?

2. What realistic changes might have shortened the time between first hearing about it and investing (or investing more, or holding it longer)?

At a high level, the answer to #1 is that you need to be reading weirder, different stuff. If you wait to read about an investment idea in the New York Times, it will be long after all the major gains have been made. 

To have been reading about it really really early, you had to be both technically very adept, and reading widely outside the box. Like this guy. Or this guy. Are your reading lists as varied and out there as blog.jim? Somehow I doubt it.

Strangely enough, you might have done extremely well multiple times over since bitcoin became popular even if you just learned the rather narrow lesson "I should learn up to the absolute cutting edge of cryptocurrency, so that I can meaningfully contribute to the small group conversations about what might be the next development in the crypto space". You might have gotten in at the ground floor on Ethereum, or Polkadot, or Chainlink, or a number of others. You might still get in on the next shitcoin to explode. 

In my case, the thing that tipped me over the edge for investing was in 2017 I finally got around to reading Moldbug's essays on bitcoin. I'd read through most of his archives starting in around 2013, but to my great regret, looked at the vaguely finance stuff and decided "eh, I already understand finance, I'm going to skip it." Ha! If there's a single lesson from Bitcoin, it's that in 2009 nobody much understood how money worked. As it turns out, Moldbug's description of bitcoin was entirely correct, he just seemed to me (certainly by 2017) to be wrong about the likelihood of the US government shutting it all down. It seems like hard work, and it's easier to just tax it and enforce know-your-customer requirements on fiat exchanges (which is what happened). 

A related lesson is "you should read more Moldbug, and consider investing in things he talks about, though still take what he says with a grain of salt". That still might yet be a highly lucrative lesson in the fullness of time. 

But I think the real place to improve is actually in #2. 

There are many people who heard about bitcoin back in, say 2013, and thought it sounded pretty weird, and probably likely to collapse. But if they were pushed on the issue at the time, you could have likely gotten them to agree that it was at least worth a punt for a few hundred bucks. 

The question is, how many people actually had that subsequent thought themselves? And moreover, how many actually followed through on it?

Smart people with all the information in front of them frequently fail at both hurdles. They fail to recognise the investment implications of the things they already know, especially when what they know to be true seems strange and unpopular to most people, and thus less likely to be priced in. And they fail to pull the trigger on it in a timely manner. 

The same is true, incidentally, from Covid. A few days after I wrote the post linked, I bought put options on the S&P 500. The thought process initially was "Huh, Covid could be a huge problem, I should buy N95 masks.". It took a couple of days for the follow-on thought (which should have been obvious) to occur "Wait, why am I hedging extreme left tail outcomes in goods markets, but not also hedging (and profiting from) moderate left tail outcomes in financial markets?". That also made me a decent but not life changing amount of money too, about a quarter of which I lost by holding onto my short positions too long instead of buying back in once I sensed that peak panic was passed (the losses are much larger in alpha terms, since you should include the opportunity cost of not being long in April and May 2020, which was huge).   

The thing that may or may not be surprising to you is that I know a fair number of people who read about Covid in early February 2020 and didn't act on it financially at all. I actually understand this. It took me several days to think of it, and I may easily have not done it, or not had the stones. Even when I did, I did it in a panicked and dumb way, just shorting the market. Not airlines, or cruise lines, or buying Zoom. Or, what would have been even better, credit default swaps (if you were one of the big boys ) or call options on the VIX if you weren't. I also managed to predict the wrong thing about Covid, namely that it was going to have a massively high death rate, and managed to screw up most of the market timing decisions I made over the course of 2020. One big good decision, managed to outweigh a considerable number of smaller bad ones, but I definitely didn't come out of 2020 thinking that I needed to do more market timing.

To be honest, the regular reading of weird twitter feeds is one of the things I miss since giving up twitter. It was a complete sewer, a cesspit of aggravation deliberately made to encourage rage-clicks and anxiety, run by people who hate me, and you, and everyone reading this. And yet, there is still material on there that you just can't find anywhere else. 

If you read the same things as everyone else, you will think the same things as everyone else. Not many of those people acquire life-changing amounts of money, except by pure chance.